Law Practice Magazine

DIVERSITY ISSUE

Ask Bill: Q&A

Q. Bill, I’m wondering if lawyers are forever tied to hourly billing. What happened to all the talk about “value” billing? I used to read a lot about it, but maybe the enthusiasm for the concept has waned for some reason.

A. I recall my first exposure to alternatives to the billable hour. It was in 1989 when I went to a Law Practice Management Section conference on the topic. The ABA had just published a book titled Beyond the Billable Hour: An Anthology of Alternative Billing Methods, and everyone was predicting the demise of hourly billing and the rise of other billing methods. Yet here we are nearly 20 years later and lawyers are still billing by the hour, or by tenths of an hour in most cases.

That 1989 anthology was edited by the late Richard C. Reed (who also wrote other books on the subject). Some years ago Reed passed the value-billing torch to Oklahoma lawyers Mark Robertson and Jim Calloway. Mark and Jim coauthored the popular Winning Alternatives to the Billable Hour: Strategies That Work (with its 2nd edition published by the ABA in 2002), and they have just finished the updated and revised third edition of their Winning Alternatives to the Billable Hour book.

I asked Mark and Jim what they thought about the state of alternative billing. They responded by saying there are forces at work that get in the way of implementing alternative methods—from both the lawyer’s side and the client’s side. Those forces have slowed the pace of change in a way that might not have been predicted nearly two decades ago when the trend first emerged. Both Mark and Jim remain encouraged, though, and say there’s “no doubt that changes are coming.”

One of the reasons that they cite is the desire on the part of corporate counsel to manage the cost of legal services. As part of this, they note how corporations are increasingly outsourcing basic research or contract drafting to law firms in India and elsewhere. That trend is driving U.S. firms “to review how they charge for such work” so they can be competitive with the Indian firms.

As another example of changes afoot on the client side, Mark and Jim point out that insurance companies (who are large consumers of legal services) “have been initiating new fee-setting arrangements with their counsel that would have been improbable a decade ago.” And they note that many lawyers now consider an insurance defense practice to be less lucrative than it was some years ago.

Overall, this is Mark and Jim’s view: “Whether you call it alternative billing, value billing, fixed-fee billing or task-based billing, the time has come to examine how to fairly charge for legal services so that the outcome can be ‘win-win’ for everyone.”

The Paradox in Defining “Fair”

So what are some of the means for achieving a win-win outcome? Clearly, technology can have a role. But in their new book, Jim and Mark pose the question of whether the timesaving benefits of technology should simply “reduce the fees charged to clients” or “be shared between the lawyer and client.” They say that if lawyers don’t share in the benefits of better efficiency through technology (or actually suffer financially) “then a logical conclusion would be for lawyers to avoid improving their practices through the use of technology.”

This, in their view, creates a paradox for both clients and lawyers: “The paradox is that the focus of most technology in the law practice is to decrease the time that it takes to accomplish a task. The more productive you become using technology, the less income you make if you bill only by the hour! The value to the client has not changed (or if it has, it has gone up, since the service is more immediate)—so why should the charges for such legal services be less?”

While they acknowledge that value is an elusive quality, Jim and Mark argue that “discussing billing methods is impossible without considering the ‘value’ received and perceived by the client.” Their view (considered radical by some) is that “the actual time personally contributed to a task by the lawyer can be almost meaningless in regard to the value of the product.” They cite the example of an experienced medical malpractice lawyer who is able to produce a set of interrogatories in a short time based on the fact that she has done so in prior cases. They ask whether anyone would doubt that the interrogatories prepared after years of experience were likely “superior to those propounded in the first case even though they took less time to draft?”

At the same, they observe, “experience may not always be rewarded with higher rates.” But that then leads to the question of whether a lawyer who normally charges $220 per hour and takes 10 hours to prepare interrogatories is any more entitled to a fee of $2,200 than the litigator who takes only two hours to prepare the same documents based on years of experience. “Is it ethical for him to ‘pad’ his time to reflect 10 hours work when he only had two?” ask Jim and Mark.

The answer depends, of course, on the fee agreement that the lawyer has with the client. If the agreement calls for straight hourly billing, then the answer would be no. That seems to me to take us back to the paradox mentioned earlier. If the lawyer wants to bill on an hourly basis or on some basis other than time spent, then the agreement with the client needs to reflect that arrangement.

If the client’s goal is to reduce legal costs, the idea of the lawyer getting a “windfall” profit by billing $2,200 for something that took only two hours may be troublesome. The client would probably argue that the past practice of spending 10 hours on interrogatories was never justified to start with and it’s ridiculous now that everyone has a computer and access to form interrogatories. The lawyer, though, could argue that a lot more goes into drafting complex interrogatories than merely filling out some forms and that constitutes the “value” in the value proposition.

That takes us back to outsourcing. If the lawyer insists on billing $2,200 for something that takes only two hours, then his clients may be more inclined to find out if they can get the same value and expertise by having the work done in a low-wage country such as India, where the cost of legal work is a mere fraction of what it is in the United States.

Mark and Jim sum up the situation this way: “Hourly billing is not an inherently evil practice. In fact, there may be certain types of tasks that can be time-intensive and are outside of the law firm’s control that are still best billed on an hourly basis. But one can also conclude that the economic pressures and challenges will continue to build.”